U.S. Postal Service Fares Worse in Recession than Foreign Posts
A new paper from postal expert Michael Schuyler compares the financial performance of the U.S. Postal Service to foreign postal service providers. Not surprisingly, the USPS, which has lost over $25 billion since 2006 and ranks near the bottom of the Postal Index of Freedom, doesn’t fare too well.
From the paper:
[Universal Postal Union] data indicate that, in each year, the majority of posts in high-income jurisdictions were profitable. Declining mail demand was stressful, though: the share of posts reporting losses increased from less than one in ten in 2007 to more than one in three in 2010. Nevertheless, few posts lost money consistently: under 20% over the period 2008-2010 and under 10% over the period 2007-2008, which suggests most foreign posts reacted quickly and effectively to financial setbacks. The good news is that posts can adjust to change and remain financially viable. Unfortunately, USPS is among the posts with consistent losses. Further, UPU data show that, in each year, more than half the reporting posts in medium-income jurisdictions were profitable. Few spilled red ink year after year.
Schuyler says that he will explore the reasons for the USPS’s comparatively poor performance in a future paper, but notes that “A key finding will be that Congressional restrictions and pressure often deny the Postal Service the operational flexibility needed to manage its costs properly.” In a Cato essay, I discuss the problems with Congress’s micromanagement of the U.S. Postal Service and conclude that it should be placed on the path to privatization.
Another postal expert, Alan Robinson, notes Schuyler’s piece and offers additional commentary on the need for policymakers to figure out what to do with the flailing postal service. Should the USPS go back to being subsidized by taxpayers? Or should the USPS remain a part of the federal government at all? Robinson concludes that “it is time for postal service stakeholders, and in particular its labor unions, to develop an acceptable path toward privatization.”
Postal Vision 2020
Postal Vision 2020 is a conference scheduled for June in Arlington, VA, that will discuss the U.S. Postal Service’s long-term prospects in our increasingly digitized world. Here’s how the Washington Post’s Ed O’Keefe frames the gathering:
As mail volume continues to plummet and more Americans use the Internet to pay bills and keep in touch, Google executives, social media experts and some of the most passionate tech evangelists are planning to meet in Crystal City in mid-June to sort out how to save and remake the nation’s mail delivery service.
That sounds like a good group for discussing ideas on how to “remake the nation’s mail delivery service” given that the USPS is the antithesis of companies like Google. Creative, innovative, entrepreneurial, and competitive are words that one would associate with Google—not the government’s mail monopoly. However, should these folks be getting together to discuss saving the USPS? That notion strikes me as akin to having Henry Ford come up with ideas on saving the horse and buggy.
As I discuss in a Cato essay on the USPS, the socialist mail enterprise cannot survive in its current form—at least not without a reintroduction of taxpayer subsidies. The USPS’s revenue base has been irrevocably undermined by the growth in digital communications, and congressional micromanagement makes sufficient cost-cutting extremely difficult. Thus, I would argue that the goal should be to create a market for postal services rather than to “save” the USPS:
Policymakers resistant to reform often depict the USPS as a “national asset” that “binds the nation together.” But these days, it’s the Internet and our telecommunications networks that bind families and businesses together across the nation. It’s time to let go of the nostalgia for the USPS and bring America’s postal services into the 21st century with privatization, open competition, and entrepreneurial innovation.
Unfortunately, the sclerosis at the USPS is a reflection of the sclerosis in Congress. As Chris Edwards and I have repeatedly discussed with each other, it is incredibly difficult for Congress to think outside the box on policy. One reason is that because the federal government has become so massive, policymakers have little time to devote to big ideas like transforming the USPS. That, of course, assumes that policymakers are interested in such big ideas. For many members of Congress, interest in the USPS doesn’t go much further than franking privileges and naming post offices.
Bailout Coming for the Postal Service?
The U.S. Postal Service is in financial trouble. Undermined by advances in electronic communication, weighed down by excessive labor costs and operationally straitjacketed by Congress, the government’s mail monopoly is running on fumes and faces large unfunded liabilities. Socialism apparently has its limits.
While the Europeans continue to shift away from government-run postal monopolies toward market liberalization, policymakers in the United States still have their heads stuck in the twentieth century. That means looking for an easy way out, which in Washington usually means a bailout.
Self-interested parties – including the postal unions, mailers, and postal management – have coalesced around the notion that the U.S. Treasury owes the USPS somewhere around $50-$75 billion. (Of course, “U.S. Treasury” is just another word for “taxpayers.”) Policymakers with responsibility for overseeing the USPS have introduced legislation that would require the Treasury to credit it with the money.
Explaining the background and validity of this claim is very complicated. Fortunately, Michael Schuyler, a seasoned expert on the USPS for the Institute for Research on the Economics of Taxation, has produced such a paper.
At issue is whether the USPS “unfairly” overpaid on pension obligations for particular employees under the long defunct Civil Service Retirement System. The USPS’s inspector-general has concluded that the USPS is owed the money. The Office of Personnel Management, which administers the pensions of federal government employees, and its inspector-general have concluded otherwise. Again, it’s complicated and Schuyler’s paper should be read to understand the ins and outs.
Therefore, I’ll simply conclude with Schuyler’s take on what the transfer would mean for taxpayers:
Given the frighteningly large federal deficit and the mushrooming federal debt, a $50-$75 billion credit to the Postal Service and debit to the U.S. Treasury will be a difficult sell, politically and economically. Although some advocates of a $50-$70 billion transfer assert it would be “an internal transfer of surplus pension funds” that would allow the Postal Service to fund promised retiree health benefits “at no cost to taxpayers,” the reality is that the transfer would shift more obligations to Treasury, which would increase the already heavy burden on taxpayers, who ultimately pay Treasury’s bills. (The Congressional Budget Office (CBO) prepares the official cost estimates for bills before Congress. Judging by how it has scored some earlier postal bills, CBO would undoubtedly report that the transfer would increase the federal budget deficit.) For those attempting to reduce the federal deficit, the transfer would be a $50-$70 billion setback.
Sounds like a bailout to me.
See this Cato essay for more on the U.S. Postal Service and why policymakers should be moving toward privatization.
Postal Service Announces $8.5 Billion Loss
The U.S. Postal service has announced a net loss of $8.5 billion for fiscal 2010. Since 2006, the USPS has lost $20 billion, and the organization is close to maxing out its $15 billion line of credit with the U.S. Treasury. Although the USPS has achieved some cost savings, they haven’t been enough to overcome a large drop in revenue due to the recession and the greater use of electronic alternatives by the public.
The USPS is required to make substantial annual payments to pre-fund retiree health care benefits. Last year, Congress allowed the USPS to postpone $4 billion of its fiscal 2009 into the future. However, Congress did not provide similar relief on this year’s required payment of $5.5 billion.
Critics of the retiree health care pre-funding requirement argue that no other federal agencies or private companies face such obligations. The argument is largely irrelevant for two reasons. First, the federal government’s financial practices are nothing to emulate. Second, very few private sector workers even receive retiree health care benefits.
In 2008, only 17 percent of private sector workers were employed at a business that offered health benefits to Medicare-eligible retirees, down from 28 percent in 1997. The actual number of private sector workers receiving these benefits is even lower as not all employees employed at the 17 percent of businesses that offers retiree health benefits are eligible to receive them.
The retiree health care benefit pre-funding requirement has become a rallying cry for the postal unions, as any threat to USPS solvency is a threat to the excessive compensation and benefits they’ve been able to extract from the postal service for their membership over the years.
Policymakers should properly view the retiree health care benefit as a symbol of postal labor excess, which continues to weigh the USPS down like an anchor. Therefore, they should avoid allowing the USPS to further postpone these payments into the future, which could lead to a taxpayer bailout. Instead, policymakers should recognize that the USPS’s financial woes require bolder action: privatization.
Postmaster General Stepping Down
Postmaster General John Potter has announced that he is stepping down. The Washington Post speculates on the reason for Potter’s departure:
It is not immediately clear why Potter decided to step down, though USPS staffers and others in the postal community — a wide fraternity including the shipping industry, labor unions and large retailers — signaled recently that he was likely to go after another record year of financial losses and failing to earn greater management flexibilities from Congress.
When Potter testified before a Senate Appropriations subcommittee hearing in March on the USPS’s desire to drop Saturday delivery, I noted that his comments indicated the need to privatize the U.S. Postal Service.
In his testimony, Potter stated:
If the Postal Service were provided with the flexibilities used by businesses in the marketplace to streamline their operations and reduce costs, we would become a more efficient and effective organization. Such a change would also allow us to more quickly adapt to meet the evolving needs, demands, and activities of our customers, now and in the future.
Of course, Congress has shown virtually no interest in giving the USPS, which is bleeding red ink, the greater flexibility it needs. This makes me wonder if Potter will reach the same conclusion that his predecessor, William Henderson, reached following his departure from the USPS.
Three short months after Henderson stepped down as postmaster general in June 2001, he penned an op-ed in the Washington Post that called for the USPS to be privatized.
Henderson wrote:
But for all the ways in which the Postal Service already resembles a private company, it lacks the advantages of any other corporation, such as being able to turn on a dime when it comes to rate changes, perhaps raising prices at times of high demand and lowering prices to entice customers during traditionally slow times, which for the Postal Service means summer. Today, a price change requires the permission of the Postal Rate Commission — a yearlong process.
And unlike a private company, the Postal Service has a universal service obligation, meaning it must deliver everywhere, six days a week, at a regularly scheduled time, making the delivery even for a single piece of mail, which is not cost-effective. And it means delivering in the Grand Canyon and in rural Alaska and in high-risk neighborhoods and lots of other places where delivery is not cost-effective.
The trade-off is that the Postal Service gets monopoly protection; no private company is allowed to compete with it head to head by carrying letter mail or using the mailbox. It should give up that protection for the greater benefits of privatization.
Henderson’s conclusion still rings true almost ten years later:
I can’t believe that 25 years from now the Postal Service will still be owned by the federal government. But the point is that, as with any government asset, this one needs to be maximized. And that means we need to free ourselves from the usual discussion about controlling costs or keeping rates stable or mailing more, all of which is simply a form of denial about the real issue. The model itself is not going to work for the long haul: It must be changed.
Unfortunately, Congress is still in denial. In commenting on Potter’s departure, Sen. Susan Collins (R-ME) offered the vacuous statement that his successor “must strengthen the Postal Service by cutting costs, enticing more customers and putting this vital institution on a sound financial footing.” Instead, Sen. Collins and her colleagues need to recognize that the USPS model “is not going to work for the long haul” so long as politicians ultimately remain in charge.
Postal Union Wants More
The finances of the U.S. Postal Service are deeply in the red. The agency faces a permanently reduced demand for its services and its labor accounts for almost 80 percent of its costs. Thus it is not a good time for postal employees to get an increase in wages and benefits, right?
According to one postal union, the USPS’s deteriorating condition isn’t relevant. The American Postal Workers Union, which represents more than 200,000 employees, has recently entered collective bargaining negotiations for a new contract. In an interview with Government Executive, APWU President William Burrus calls a pay increase for his members an “entitlement”:
“More — more control over activities at work, more money, better benefits — we want more,” said Burrus. “We will try to fashion our proposals to reflect the entitlement to more.”
An arbitrator will most likely determine whether APWU workers get their raises. Oddly, according to federal law an arbitrator can’t take the USPS’s financial condition into account when weighing a decision. This is like instructing the captain of a ship that’s struck an iceberg to ignore the gaping hole in the boat when deciding whether or not to abandon it.
USPS management has asked Congress to change the law, which Burrus preposterously calls “antidemocratic”:
Burrus said he resents the idea that an arbitrator should be required to take into account the Postal Service’s financial situation. He called the idea antidemocratic and said it interferes with free collective bargaining.
Having watched the unionized workforces at GM and Chrysler receive preferential treatment from the federal government, there’s little incentive for Burrus and the postal unions to not ask for more. The postal unions are likely betting that in a worst case financial scenario for the USPS, policymakers will tap taxpayers for a bailout. Unfortunately, if recent history is a guide, they’re probably correct.
The Postal Service’s Union Problem
Comments from members of the House Oversight and Government Reform Committee at a recent hearing on the U.S. Postal Service’s woes indicate they don’t appreciate the USPS’s union problem. Postmaster General John Potter went before the committee to make his case for restructuring the postal operation, including greater labor flexibility.
From GovExec.com:
“You have to find people meaningful work, or no matter how compassionate you are, you’re not doing them any favors,” said Rep. Darrell Issa, R-Calif., the ranking member of the House Oversight and Government Reform Committee, criticizing holding rooms where underemployed postal workers wait until there are tasks for them to perform. “How many billions of dollars would have been saved if you’d aggressively right-sized the force before you came to us and said you want to go from six days [of mail delivery] to five?”
Congressman Issa should be informed that it is union rules that prevent postal management from laying off underemployed postal workers and having to put them in holding rooms.
Issa told Potter during his opening statement that the Postal Service has “more or less a third more people than you need,” but he said it “is not really acceptable” to convert full-time jobs to part-time positions, unless applicants are looking specifically for part-time work or part-time positions that lead to full-time work. Rep. Diane Watson, D-Calif., said she was concerned that part-time workers might not be treated fairly or could be excluded from collective bargaining agreements.
Lawmakers insisted repeatedly that even as the Postal Service confronts harsh financial realities, the agency must take into consideration the jobs of postal workers. “I’m hopeful this committee will find a way to deal with it that preserves the good faith that the people who serve the U.S. Postal Service have a right to expect,” said Rep. Dennis Kucinich, D-Ohio.
These members might want to read the Government Accountability Office’s latest report on the USPS, which called the mail monopoly’s business model “not viable.” Union labor is part of the problem. The average postal employee earns $83,000 a year in total compensation and 85 percent of its workforce is covered by collective bargaining agreements. Labor accounts for 80 percent of the USPS’s cost structure.
The GAO cites the following as reasons why USPS labor costs are so high:
- The USPS covers a higher proportion of employee premiums for health care and life insurance than most other federal agencies, which is impressive because it’s hard to be more generous than federal agencies.
- USPS workers participate in the federal workers’ compensation program, which generally provides larger benefits than the private sector. And instead of retiring when eligible, USPS workers can stay on the “more generous” workers’ compensation rolls.
- Collective bargaining agreements limit the amount of part-time and contract workers the USPS can use to fit its workload needs, and they limit managers from assigning work to employees outside of their crafts. The latter explains why you get stuck waiting in line at the post office while other postal employees seemingly oblivious to customers’ needs go about doing less important tasks.
- Most postal employees are protected by “no-layoff” provisions, and the USPS must let go lower-cost part-time and temporary employees before it can lay off a full-time worker not covered by a no-layoff provision.
- If the collective bargaining process reaches binding arbitration, there is no statutory requirement for the USPS’s financial condition to be considered. This is like making the decision whether or not to go fishing, but not taking into consideration the fact that the boat has holes in its bottom.
The fact that Postmaster Potter has to go to Congress to plead for help to make business decisions points to a fundamental problem. Government-run businesses are necessarily hamstrung by the whims of politicians, who often only have a vague understanding of economics and business. If FedEx or UPS had to get congressional permission to manage its workforce, both would collapse. As mail volume falls, that’s where the USPS is headed unless we privatize it and deregulate postal markets.
Congress Is Hurdle to USPS Reforms
National Journal reports that two key policymakers don’t support the U.S. Postal Service’s desire to eliminate Saturday mail delivery. House Financial Services Appropriations Subcommittee Chairman Jose Serrano (D-NY) says he’ll be working with USPS management and the postal unions to avoid service cuts. And House Oversight and Government Reform Federal Workforce Subcommittee ranking member Jason Chaffetz (R-UT) announced that he too opposes the move.
Chaffetz intends to introduce legislation that would instead eliminate twelve delivery days a year. Twelve days? With the USPS facing $238 billion in losses over the next ten years, it’s hard to understand why the Republican congressman is fiddling around with such small changes.
From the article:
Chaffetz said he is concerned that if the Postal Service cuts Saturday deliveries, it could end up hurting itself in the long run by creating an opening for private delivery companies. “You have got to serve your customers, or somebody else will come in and do it for you,” he said.
What private delivery companies? UPS and FedEx are allowed to compete with the USPS on express mail delivery, but the USPS has a government-granted monopoly on regular mail. In pointing out that the USPS’s reduction in services isn’t good for customers, Chaffetz unintentionally make the cases for opening up the mails to competition from private providers.
“The challenge for the Postal Service is to become more relevant to people’s lives,” he said. “They have been cutting back … and I applaud them for that. The Postal Service is also one of the few things highlighted in U.S. Constitution. They’ve got to figure out ways to cut and make it more relevant.”
Mr. Chaffetz: The Constitution gives the federal government the power “to establish Post Offices and post Roads.” It doesn’t say the government has to have a monopoly over the provision of mail. Nor does it say that Congress must perform this service. Today, there are better private options.
The reality is that the USPS is bleeding red ink because it is becoming less relevant to people’s lives because of electronic communication. Surely Rep. Chaffetz doesn’t want the government’s mail monopolist involved in electronic correspondence to make it more “relevant”?
A story out of Finland demonstrates why that would be a bad idea. Finland’s state-owned postal service is testing a cost-cutting idea that would have it open mail, scan it, and then send an electronic copy to a digital mailbox. The original mail would then be sealed up and physically delivered, but delivery would only be done twice a week. Fins are rightly concerned about their civil liberties being violated by the government viewing their private correspondence.
The underlying idea behind the Finnish experiment is nonetheless sound. In a competitive market for mail delivery, electronic scanning and transmittal would be a more cost-effective — and thus perhaps profitable — way of getting people their mail. This could be especially appealing for costly-to-deliver rural areas, which proponents of the USPS often cite as a reason why mail privatization is untenable.
Postmaster Indicates Need for Privatization
A recent Senate Appropriations subcommittee hearing on the U.S. Postal Service’s dire financial prospects found little enthusiasm for the USPS’s idea to eliminate Saturday mail service. Financial Services subcommittee chairman Sen. Richard Durbin (D-IL) said “serious questions need to be asked and answered,” and ranking member Sen. Susan Collins (R-ME) expressed concern that it would send the USPS into “a death spiral.”
The USPS is already in a death spiral due to changes in technology, high labor costs, and costly congressional mandates that have left it facing a projected $238 billion in losses over the next ten years. The USPS says dropping Saturday service would save the USPS $3 billion a year. However, the Postal Regulatory Commission believes the savings would be significantly smaller. Regardless, if the USPS stops Saturday service then private firms should be allowed to provide Saturday mail service.
Better yet, the USPS monopoly should be completely repealed and private firms allowed to deliver mail every day of the week. Interestingly, Postmaster General John Potter’s testimony inadvertently makes a case for privatizing the USPS.
Potter notes that when private businesses are losing money, they sell off assets, close locations, and reduce employment. He cites Sears, L.L. Bean, and Starbucks as recent examples of companies making cost cutting moves in the face of declining revenues. The Government Accountability Office’s testimony noted that the USPS has more retail outlets (36,500) than McDonalds, Starbucks, and Walgreens combined. Yet, its post offices average 600 visits per week, which is only 10 percent of Walgreen’s average weekly traffic.
In his testimony, Potter states:
If the Postal Service were provided with the flexibilities used by businesses in the marketplace to streamline their operations and reduce costs, we would become a more efficient and effective organization. Such a change would also allow us to more quickly adapt to meet the evolving needs, demands, and activities of our customers, now and in the future.
This is precisely why the USPS needs to be privatized and subjected to the demands of the market and not the whims of Congress. Members of congress always raise a fuss when the USPS targets postal outlets for closure in their districts.
Potter wants Congress to suspend a requirement that the USPS pre-fund its retiree health benefits. He argues that the trust fund for these payments has a $35 billion balance, which he says is enough to pay the health premiums for its 500,000 retirees through their lifetimes.
The more fundamental problem is the existence of this generous benefit to begin with. Potter notes that private companies aren’t subject to a pre-funding mandate. But the vast majority of private companies don’t even offer retiree health benefits. The GAO also points out that the USPS retiree benefits are generous even by government standards:
USPS pays a higher percentage of employee health benefit premiums than other federal agencies (80 percent versus 72 percent, respectively). In addition, USPS pays 100 percent of employee life insurance premiums, while other federal agencies pay about 33 percent.
Potter naturally wants more flexibility in dealing with the USPS’s excessive labor costs. The average postal employee receives $83,000 a year in total compensation. Employee pay and benefits constitute 80 percent of the USPS’s cost structure, which despite increased automation has remained the same since the 1960s. But so long as the USPS remains a government enterprise, it’s hard to imagine Congress standing up to the postal unions and giving management the labor flexibility it desires.
Finally, Potter wants the USPS to have more freedom when it comes to pricing and getting into new lines of business:
We also need the ability to expand our products and services, and ensure prices for our Market-Dominant products are based on the demand and cost of each individual product.
“Market-Dominant” is an Orwellian way of saying “Government Granted Monopoly.” Again, if the Postmaster wants mail prices to have an economic rationale, then the USPS needs to be privatized so that the market can efficiently set prices. Further, the USPS has a poor track record when it comes to expanding into services not protected by its monopoly. Plus it would be competing against the private sector on advantageous terms due to its status as a government enterprise.
What Potter wants — and needs — is something that only the private sector can provide. If the Senate hearing is any indication, Congress has no present plans to relinquish its control over the dying government monopoly. Instead, the USPS will likely continue to bleed red until policymakers run out of band-aids and are finally confronted with the choice of either privatization or direct taxpayer funding.
Government of Continual Failure
The Washington Post is full of so many stories about government failure these days, it’s hard to keep up.
Today, on page A19 we learn about a Small Business Administration subsidy program that has a 60-percent default rate. On the same page, we learn that the U.S. Postal Service will lose $7 billion this year.
Flipping over to page A20, we learn that former New York City Police Commissioner Bernard Kerik is a liar, a tax cheat, and thoroughly corrupt.
Then flip back to A15, and columnist Steve Pearlstein rightly lambastes the latest stimulus scheme from Congress: ”This $10 billion boondoggle is nothing more than a giveaway to the real estate industrial complex.”
Finally, on A14, we’ve got government-owned Fannie Mae losing a colossal $19 billion this year and asking the Treasury for another $15 billion taxpayer hand-out.
The federal government is a mess. Policymakers have no idea what the effects will be when they spend billions on scheme after scheme. Most of them don’t read the legislation, they don’t understand economics, and they never admit mistakes when their schemes almost inevitably fail. Fully 40 percent of the vast federal budget will be debt-fueled this year, but few policymakers seem to care. And public corruption seems never-ending.
Isn’t it time to give libertarianism a chance?
Cato on Facebook
Cato on Twitter
Cato on Google+
Cato on YouTube
